Microcredit: A different kind of Slumdog Millionaire

While it is heartening that there is growing traction to add a larger component to microcredit (aka microfinance) in the economic stimulus package it is important to be vigilant to instances of abuse.

This blog has been championing an increased focus on microcredit for some time now. Previous posts are labelled as microfinance.

I presume that the new attention being paid to microfinance by the government is intended to meet the challenge of unemployment. Unemployment is a spectre that arises largely due to the imploding export demand, particularly in the electrical and electronics (E&E) sector which affects, not just the large multi-national FDIs but, also the SMEs that provide ancillary goods and services.

Policy makers must be alert to the implementation process.

Remember the roots of microfinance
If you care to read my earlier postings on this subject you will find that the success of microfinance has its roots in community self-help. The operative word is community. I emphasise again, community.

The reason for the low default rate for microfinance is that the community will rally around weaker borrowers and find a solution. This internalises challenges faced by borrowers. It makes the problem personal and communal. Again, it makes the default challenge both personal and communal.

A delinquent microfinance borrower will be socially ostracised if the money is abused by being re-directed, say, from a market gardening project to a high-risk keretek trading scam.

A less personal delivery system than the original model
In delivering the allocations for microfinance, it is likely that conventional commercial banks will be used in addition to bodies like Amanah Ikhtiar Malaysia(AIM).

Let's be brutally honest. Banks will not find microfinance profitable. The amount of time spent on a microfinance loan will be similar to a large housing loan. So, they will quietly shoo-away the moms-and-pops, pakciks and makciks. Besides, banks are intimidating.

Having said that, Agro Bank and Bank Rakyat probably have the correct temperament to deliver microfinance at the level that is truly effective.

Reaching out to the correct target sector
Beyond AIM, Agro Bank and Bank Rakyat, the local village heads and ketua kampung must be conscripted to organise small talks by officers and representatves of these microfinance bodies so that farmers and small business operators understand all the key features of microfinance. This process of links back to the idea of community upon which the principles of microfinance are founded.

Who to be careful of
The segment that microfinance bodies must be extra vigilant about are the individuals who may have become recently unemployed and, those who are in financial difficulties from bad spending habits. These are the people who are looking to scam the microfinance bodies.

These are the people who cook up business schemes for the sole purpose of landing RM10,000-00 to pay off their debts. These people have no genuine interest in starting a business. Their heart is not in it. These are the people who will contribute to the default rate for microfinance. They will give genuine borrowers a bad name.

That is why some form of introduction is necessary. Mere written proposals and business plans are not good enough. The microfinance bodies must have a procedure where applicants must be introduced by existing borrowers with good track records, the village head or ketua kampung, or someone of standing.

And, the geographic location of the business is also a key. Microfinance drives neighbourhood businesses. If the applicant is a stranger to the locality, chances are the applicant does not know the customer base and, has no qualms about defaulting since there will be no social stigma attached.

To be forewarned is to be forearmed.